Michael Addis

Market Commentary

For the week ending 27 October 2017
Report by Michael Addis
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Michael Addis

Japanese equities started the week on the front foot after the ruling Liberal Democratic Party decisively won last Sunday’s general election, making Prime Minister Abe’s position increasingly secure and adding fuel to the early momentum already seen from his economic policies, now called Abenomics. Prime Minister Abe, having seen a material fall in approval ratings earlier in the year, benefited from opposition party disarray, almost the exact opposite of what we witnessed back in the UK, when Theresa May gambled on increasing her “strong and stable” mandate to guide the UK economy through the Brexit process. The Japanese election result and ensuing stability is likely to tempt foreign investors back into Japanese equities, having remained on the sidelines following the initial excitement around Abenomics in 2013.

UK data releases have taken on greater significance of late, as consensus builds around the likely first UK interest rate increase in over a decade next week. The last major hard data reading that the Monetary Policy Committee received ahead of their meeting on 02 November was Wednesday’s preliminary release of third quarter Gross Domestic Product, which came in stronger than both the Bank of England, and consensus expected at 0.4%. This further cemented expectations of an imminent interest rate hike, sending gilt prices lower and Sterling higher. Manufacturing reported a strong 1% quarterly rise, driving the overall better than expected result, after a weak second quarter reading. In addition, it was pleasing to see that the retail sector was a key driver of the respectable 0.4% quarterly growth in the service sector. The market is now pricing in an 85% probability of a rate increase next week. Stronger growth might also afford the Chancellor, Philip Hammond, a little more fiscal flexibility in next month’s Budget.

Central Bank policy remained in focus on Thursday, as the European Central Bank (ECB) announced it is to halve the pace of its bond buying programme to €30billion a month from January 2018, until at least the end of September 2018. Importantly, to avoid the risk of another market upset akin to that seen emanating from the US in 2013 (the so called “taper tantrum”), the ECB added that purchases would continue until the Governing Council sees a sustained adjustment in the path of inflation, consistent with its inflation aim and even pointed out that the size of purchases could be increased if the outlook becomes less favourable. This degree of caution was a little more dovish than expected, sending the Euro marginally weaker.

Events of the week suggest that the road to global policy normalisation has finally begun, but it will be a long road with many twists and turns along the way. However, what the new “normal” will be and how long it will last, remains to be seen.